>THE PAPER PRODUCTS LIMITED: Owned by Finland based Huhtamaki Oyj group

 Stable business model and margin profile lends consistency in cash flow and good earnings visibility: PPL packaging products enjoys consistent demand on account of strong underlying demand from the FMCG business, with a decent average volume growth (8-10% YoY). The company operates on a cost plus margin business model and hence has a stable margin profile with an EBITDA margin in the range of 9-11% (avg of last 4 yrs - 10.2%). We expect PPL’s net sales, EBITDA and Adj PAT to grow at a CAGR of 13.3%, 13.8% and 11.7% over CY11-CY13E respectively. We expect the company to generate OCF of `1446 mn and FCF of `564 mn during the CY11-CY13E period.


 Tremendous growth opportunity due to a hugely under-penetrated packaging market and multiple growth drivers in end user industry: The flexible packaging market (20% of the overall packaging market) is valued at $3.5 bn, with only 35%-40% of it being organised. With an expanding middle class population, rising incomes and growth in organised retailing, FMCG and Pharmaceuticals are expected to post robust volume growth leading to a corresponding strong growth in flexible-packaging. Lower packaging penetration (per capita consumption of consumer packaging in India at $2.5 against that of $51.6 in US) will also lead to a huge structural shift from unpacked to packaged products over the next decade (currently only 15-20% of the total goods consumed in India are in packaged form). We expect flexible packaging growth at 1.2x – 1.4x the volume growth of the underlying demand.


 Strong promoter group and solid management team helps to bring in best practices, attract marquee clients, adapt newer technologies and processes based on shift in consumer trends: PPL is owned by Finland based Huhtamaki Oyj group, which is one of the top 10 consumer packaging companies in the world and has operations spread across 31 countries. The promoter group brings in best practices in terms of technology expertise, operating efficiencies and corporate governance. Moreover, Mr Suresh Gupta, MD of PPL, also heads the global flexible packaging business of Huhtamaki, which is strategically a big positive. The sales geography is increasing for PPL with exports picking up in New Zealand, Australia and South America.


 Debt-free status, high dividend yield, and reasonably good return ratios: The company has strong dividend payout policy of ~35% leading to a very good yield of ~4-5%. In addition, the company has reasonable return ratios, with expected RoAE of 16.2% and 16.4% and RoACE of 20.2% and 20.6% in CY12E and CY13E respectively.


Valuations and Outlook: At the CMP of `65.3/share, PPL is valued at a P/E of 7.3x and 6.5x CY12E and CY13E respectively. PPL is a quality MNC and a niche play on the packaging front, with consistent earning growth and a healthy B/S and OCF. Given the strong business and financial profile, strong growth prospects and that rare thing in our equity markets -- good corporate governance -- at the CMP, PPL, valued at a P/BV of 1.0x CY13E, is an attractive opportunity. We initiate coverage on the company with BUY rating and Jun13 target of `95.0/share (based on P/E multiple of 9.0x CY13E earning).


To read report in detail: THE PAPER PRODUCTS